A great deal of nonsense about the 2008 financial crisis has been written, virtually all of it utterly worthless. Apart from the absurd calls that we should learn from Marx’ fallacious trade cycle theory1 there is also Robert Shiller’s opinion that there was
a speculative bubble driven by excessive optimism, driven by public inattention to risks of such an eventuality2.
Completely missing from the commentary on the global financial crisis, at least in the numerous articles I read, was any historical perspective. Although economists, unlike physicists or chemists, cannot perform experiments they do have the next best thing and that is economic history. That so few of them draw on this invaluable source is to be deeply regretted. Equally regrettable is the unfortunate fact that of those few members of the economic commentariat who sometimes try to use this tremendous pool of material virtually all of them fail to apply it effectively.
It is a little known historical fact, particularly among economists, that financial crises originating in the banking system existed in medieval times. Continue reading Financial crises from medieval Italy and Spain to tulip mania, the Mississippi Bubble and eighteenth century England: And economists still haven’t learnt the lesson
Although these articles are not a direct criticism of Modern Monetary Theory they do show that Australia’s free market economists are just as wrong about the trade cycle as are our MMT theorists and as such serve to undermine MMT teachings.
Last week I singled out P. D. Jonson, Peter Smith and Steve Kates, who teaches at RMIT, as being hopelessly wrong in arguing that the boom-bust cycle is a natural feature of a capitalist economy. I chose these three because they have written books in which they clearly state their views on the subject. To my knowledge there is not a single free market economist in Australia who would disagree with them. In this respect there is no fundamental difference between these economists and Bill Mitchell and his fellow MMT theorists. (It also puts them in the Marxist camp.) The striking thing about all of these economists is that not one of them ever provided the slightest indication of being aware of the crucial role the gold standard played in classical thinking when it came to what they called “convulsions” or “revulsions”. Continue reading Nineteenth century trade cycle theory: fact versus myth 1
It Professor Mitchell’s real objection to a gold standard is that it puts a leash on government meddling with respect to monetary policy, meaning that politicians could not apply those so-called flexible monetary policies that nearly 220 years ago Walter Boyd aptly called “quack medicine”1. To the classical economists this was a powerful argument in favour of a gold standard, believing as they did that the “self-acting”2 mechanism of the gold standard was infinitely superior to monetary policies made by opportunistic politicians driven by a desire to obtain short-term electoral advantages. But more than anything else, they probably feared that in their ignorance politicians would fall prey to those economic fallacies that Walter Boyd warned against. Now Professor Mitchell is certainly entitled to question the classical view of the gold standard and its adoption. In doing so, however, it is incumbent upon him to get his facts straight and so avoid misleading his readers. He states:
Under what was called a gold specie standard (sometimes called a 100 per cent reserve gold standard) the central bank was required to hold gold in proportion to the currency it issued (the proportion being the gold currency exchange rate). (Return to a gold standard – don’t even think about it ). Continue reading Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 4
The striking thing about those who malign the gold standard (this also applies to most of its supporters) is their ignorance of how it really functioned, as revealed by the fact that Britain was not even on a genuine gold standard but on a quasi-gold standard. Before continuing with this line of thought we need to clarify further points regarding Professor Mitchell’s error that classical economists focused on trade deficits with respect to gold drains.
One cannot help but be struck by the professor failure to mention exchange rates or even provide an explanation for gold drains. As the classical economists had determined that the exchange rate, not the trade deficit, was the key indicator with respect to an unhealthy trade deficit and the depreciation of the currency it is necessary to understand how they arrived at this conclusion, a decision that contains important and lasting economic lessons. Continue reading Professor Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 3
Professor Mitchell tells us that under the gold standard gold was the principle means of making international payments. So when countries developed “trade imbalances” (for which he gave no explanation) gold would have to be shipped from one country to another until the balances were restored. Using Australia and New Zealand as a hypothetical example he argued that if Australian exports to New Zealand exceeded the latter’s exports to Australia “this would necessitate New Zealand shipping gold”.
He follows through with the Hume’s specie-flow theory (the classical theory of gold flows) that the inflow of gold would inflate Australia’s money supply which would drive up prices, making her exports more expensive and hence reversing the gold flow by sucking in more imports. In the meantime, poor old New Zealand’s loss of gold would cause a monetary contraction bringing about a deflation that would cause “rising unemployment and falling output and prices” until her trade balance was restored. Continue reading Professor Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 2
Bill Mitchell, like the great majority of economists, is an ardent opponent of the gold standard. He is also one of the world’s leading modern monetary theorists and a professor of economics at the University of Newcastle, New South Wales. He wrote an article attacking the gold standard, an article that revealed not only a staggering ignorance of its history but also how it functioned. This response is the first in a series that exposes Professor Mitchell’s errors.
He began his attack with the glaring blunder that the gold standard was in “vogue” in the nineteenth century into the twentieth century, that its acceptance was due to a shortage silver and that “Britain adopted the gold standard in 1844”. After that, his argument continued downhill. Unfortunately, the number of economists who share Professor Mitchell’s ignorance of the history and economics of the gold standard, including those on the right, and what it means for the business cycle is truly disheartening. Continue reading Professor Bill Mitchell, a Modern Monetary Theory exponent, gets the gold standard badly wrong: Part 1
Come 27/7/20I shall post the first of a number of articles dealing with contentious economic issues and theories that have serious political ramifications. What follows will provide readers with a brief introduction to each subject.
Professor Bill Mitchell (University of Newcastle, NSW) is one of the world’s leading proponents of MMT (modern monetary theory). As part of an effort to popularise MMT he posted articles1 that painted a grotesque picture of what is called the classical gold standard. His most egregious error is his assertion that it had a natural tendency to cause depressions. This is utter nonsense. It was deviations from the gold standard that resulted in depressions, not the gold standard itself. It is clear that Professor Mitchell’s ill-founded attack on the gold standard is part of an attempt to justify MMT policies.
My rebuttal of Professor Mitchell’s anti-gold thesis will deal in detail with all of its errors. Unfortunately, he is far from being alone in his ignorance of how the gold standard really functioned. Professor Sinclair Davidson (RMIT) is every bit his equal in that regard. It was he who unequivocally asserted that the gold standard was a bad idea without being able to explain why.2 He also blamed Australia’s sluggish growth rate in the late 1920s on the country’s return to gold. (This stuff is on par with Professor Mitchell’s gold standard nonsense.) Elsewhere, Professor Davidson emphatically stated that Australia’s recovery from the Great Depression was caused by Australia leaving the gold standard in January 1931 which he thinks led to the devaluation of the Australian pound. This is an extraordinary assertion when one considers that the country left the gold standard in December 1929, some 28 months or so before the recovery3. How Professor Davidson was able to confuse the abandoning of gold with the date the exchange rate was revalued is therefore something only he can explain. Continue reading Economic errors and fallacies concerning the gold standard, the Great Depression, Keynesianism, post-Keynesians, MMT, free trade, Austrian economics, immigration
I’ve had several emails regarding unemployment rates during the Roosevelt administration. These readers were confused by some Keynesian sites asserting that the unemployment figures were inflated. One reader wrote that “the unemployment figures must have been greatly exaggerated because they excluded people on relief. If these people had been included then unemployment in 1938 would have been 12.5 percent and not be 19 percent.” I immediately recognised the figures as coming from Michael R. Darby’s 1975 paper1.
There is a sound reason why it is Keynesian votaries that tend to use Darby’s figures while the vast majority of economists and historians stick with the conventional figures. Putting the unemployed on relief and giving them a pay check is called working for the dole. It is an attempt to hide unemployment, not eliminate it. The old statisticians and economists understood that and were scrupulously honest in their estimates. It was called relief because it was understood that this ‘employment’ was a government-funded substitute for real employment. Better to be paid for doing something rather than be paid for doing nothing. Therefore, if these had been real jobs they would not, by definition, have been called relief. Taken to its logical conclusion all a government would have to do to eliminate unemployment is assign the jobless to various activities, no matter how pointless, and classify their dole payments as wages. Continue reading Australia’s recovery from the Great Depression compared with Roosevelt’s sorry unemployment record
Posting will resume next Monday.